U.S. regulators are bent on kicking out unregulated and unlicensed digital currency lending companies, and the latest to take action is Kentucky. The state’s financial regulator has issued a cease-and-desist order against Celsius Network, accusing it of selling unregistered securities.
The regulators first set their sights on BlockFi, one of the market leaders in this field. New Jersey, Texas, Alabama, Vermont, and Kentucky all filed to kick the company out for selling unregistered securities. Next was Celsius, and now Kentucky joins New Jersey, Texas, and Alabama in taking similar measures.
The Kentucky Department of Financial Institutions said that it has been investigating Celsius since January this year and has concluded that it has been offering securities through its ‘Earn Interest Accounts.’ These accounts claim to offer their clients who deposit digital currencies an interest rate of over 8%, dwarfing the average U.S. banking savings rate which stood at 0.06% at the end of August.
Celsius claims to have attracted $24 billion through these accounts from its users. Once it collects the funds, it reportedly lends it out to institutions at a much higher rate. It claims to give back 80% of the interest earned to the clients.
However, the company doesn’t disclose what it does with the funds; the amount of money it devotes to each activity it engages in; the identity, nature or creditworthiness of the borrowers; the terms and durations of their loans; or the profits or losses derived from the activities.
The Kentucky regulator’s probe found that for three years and four months, Celsius had opened 1,607 accounts for 1,571 Kentucky residents. Collectively, they had invested $17.6 million, with the company paying them $453,353 in interest.
Celsius’ interest-bearing accounts amount to an investment contract “because they are an investment of money in a common enterprise with profits to come solely from the efforts of others,” the regulator stated, citing the Howey test.
Aside from BlockFi and Celsius (which together reportedly hold $34 billion in investor funds), Coinbase also found itself at odds with the U.S. Securities and Exchange Commission (SEC) for teasing a similar lending product.
The crackdowns won’t cease any time soon as regulators go after companies that have exploited a lack of definitive regulations to offers services that potentially risk investors’ funds. All these companies will soon have to answer for flouting financial laws, just like Crypto Crime Cartel foremost members BitMEX and Binance have been doing for the past few months.
Elizabeth Warren, the Democratic Senator from Massachusetts once stated, “Crypto is the new shadow bank. It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system.”
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple and Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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